Observations on economics, the academy, the wider world, and things that run on rails.

8.8.05

TRADE UNITES, POLITICS DIVIDES. Book Review No. 29 is Thomas Friedman's The World is Flat, which has been reviewed recently by John Gray, Jagdish Bhagwati, and Richard Freeman (the last two via Dan Drezner.) I had some preliminary observations here, and wish to offer a few more observations to supplement the aforementioned commentators. The central message of Mr Friedman's book is that recent institutional and technical innovations have made international commerce easier, to the great benefit of people capable of taking advantage of those innovations. (There's a bit of a connection to the Savage Nation discussion of Guns, Germs, and Steel here -- one post there noted that inequality within any nation is greater than the inequalities among nations. That's precisely Mr Friedman's message, which I believe he made more explicitly in Lexus and the Olive Tree, noting (I'm paraphrasing) that a Midwestern academician might have more common ground with a Taiwanese academician than with a Midwestern automobile assembler.) One point left unresolved by Mr Friedman and misunderstood by Mr Gray is precisely how much flattening the innovations will produce. It's an open question in economics. On one hand, competitive equilibrium strongly suggests the emergence of One Best Way to do everything (and, to continue my gripe from my previous post on the subject, the Marxian interpretation of that emergence includes a strong dose of monopoly leading ultimately to the expropriation of the expropriators) that will be the standard business model for everybody, and never mind what ancient traditions get trampled on in the process. Mr Friedman is sensitive to that point, proposing a taxonomy of globalization protestors of various kinds. But -- this is an economics weblog -- there is another hand. Adam Smith first suggested finer divisions of labor accompanying broader markets with wider trading opportunities. There is room for such creativity in an expanding, worldwide economy. Steven at Liberty and Power has found an example: an Ann Arbor, Michigan bank that offers rent-to-own contracts that work like home mortgages while not charging interest. Such contracts enable Moslems (the primary constituency; the anathema on interest arises in other faiths) to purchase houses without having to pay cash.

I'd argue that this sort of thing is an excellent example of how market capitalism is not a destroyer of unique cultures creating one "McWorld," but rather a flexible, dynamic set of institutions that can adapt to changes in the culture. It is only within the dynamism of the market that one can adapt ways of doing business that are "traditional" to one culture to the needs of another culture when those needs arise. So not only do we have US banks altering their practices to accommodate a distinct minority demand (something defenders of markets have long argued as one of their strengths), we also have a potential blueprint of how market institutions and practices can emerge in Muslim societies with very different ethical principles.

The best part to me is that these sorts of changes can happen in the market in small pockets and spread through imitation. They don't require extensive discussion and debate. They don't require a political voting process where the majority has to be persuaded to agree with the change. Can you imagine what it would take to make such a change in a world where banks were run by the state? The ecosystem of the market makes it much easier for a thousand flowers to bloom, and to accommodate the needs of a religous group whose numbers remain pretty small within the US.

A second topic of importance in World is Flat, as well as some of the commentaries, is the knowledge premium. Mr Friedman observes the lack of mathematical and scientific aptitude among the young in the United States, and Professor Bhagwati notes how few of the young in India have those skills, let alone the ability to speak English. (But for Mr Friedman to reduce the shortcomings of the teaching or the learning to the funding of the National Science Foundation is a bit much.) Professor Freeman advocates greater investment in human capital as well. These days, the knowledge premium favors high-skilled workers. That need not always be the case; review this discussion of Luddites and Fordism. There is a further point for analysts and policy makers to ponder. The economic theory of trade relies heavily on comparative advantages. Years ago, high transportation and information costs rendered comparative advantage a consequence of resource endowments. In the face of today's lowered transportation and information costs, comparative advantages can be invented, or invented around.

There's one more trade-off Mr Friedman does not completely lay out. He notes in one place that India's and China's development bid up the price of oil, and he raises the spectre of China working with oil-exporting countries that subsidize Islamofascists, as well as China's fear that the U.S. Navy could close the tanker lanes off Singapore, re-running the resource war that became the Pacific Theater. In another place he suggests that United States policy makers work more seriously at lowering the price of a barrel of oil, so as to de-fund those Islamofascists. If it's developing country demands that are bidding up the price of oil, there's little short of taming fusion that the United States can do to reduce the demand for oil as a fuel source; and that doesn't address the usefulness of oil as a feedstock for other chemicals or for plastics. More questions than answers.

Mr Friedman concludes with the suggestion that getting people not yet on the flat earth to buy into the idea of participating is our best long-term hope. As with any other such idea, the challenge will be in the implementation.